“I have always depended on the kindness of strangers,” said Blanche DuBois, in the final words of the play A Streetcar Named Desire. Well, don’t we all.

Many citizens probably still cling to the old saw that public debt doesn’t matter because “we owe it to ourselves.” Wrong. Debt always matters. And as for whom we owe it to, it is a lot of kind (or, at least, not yet unkind) strangers.

As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals.

Chart of U.S. national debt holders, domestic and foreign

Of about $11 trillion in U.S. debt, foreigners have about $3.8 trillion, with China in the lead at nearly $1 trillion and Japan not far behind at around $750 billion.
Most likely, though, this trend has already leveled off. The Chinese, Japanese, Russians, and Indians have openly announced their decision to cut back on further purchases and existing holdings of U.S. government debt. Beyond that, the source of funds previously allocated to their purchases — trade surpluses — has declined sharply with the recession. As a consequence, going forward, foreign buying is more apt to shrink than increase.
While foreigners are continuing to show up for the record-sized Treasury auctions, it’s due to the dollar retaining its status (albeit shakily) as the world’s reserve currency. But they have become quite cautious, generally investing towards the front end of the yield curve, which is a vote of no confidence in the buck’s future. As the chart below illustrates, sales of long-term bonds to foreigners are way down.

Treasury bond sales graph

So what does all this mean?

It means that a big chunk of our prosperity during the past twenty years was due to a trade deficit that put billions of dollars into the hands of foreigners, who then turned around and bought Treasuries with them, helping the U.S. government finance its massive deficit spending. That’s over — and the unwinding process has just begun.

Yet federal deficit spending, far from reflecting this reality, has grown by leaps and bounds. But who will finance it? Let’s extend our first chart out a few years.

Projected U.S. Debt

As you can see, we project that foreign participation has plateaued. U.S. private domestic investors can probably increase their holdings moderately, now that households are consuming less and saving more, and financial institutions have money to invest in Treasury paper. The agencies and trusts (like Social Security) are really not a part of the equation, but rather reflect programs on “auto-pilot” and quickly headed to the point where they will negatively impact, not help, the deficits.
Adding it all together, even under the most conservative of assumptions, there are simply not enough buyers to cover the accelerating federal deficits. That leaves the lender of last resort, the Federal Reserve, as the only remaining candidate to satisfy the government’s grotesque appetite for funding. There is no viable alternative.
The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must.
The editors of The Casey Report have been alerting subscribers to this very possible scenario for quite some time. If foreigners stop buying U.S. government debt, the whole house of cards will come crashing down. But you can do a lot to protect yourself financially – run with the trend instead of swimming against it. Find out more about the accurate predictions of trend hunter Doug Casey and his team, and how to profit from them . . . click here.

Throughout the “sh*t hitting the fan” events of last fall, and the subsequent policy response, we’ve listened intently on what this Canadian had to say. The picture he paints today is one of bearish conviction. That’s exactly the reason he’s come under recent criticism as his ilk of ivory tower economists have started calling an end to this recession.

Though we don’t think he has anything to prove, he released a special report reaffirming his key points. You can read it in full here. But if you don’t have the time to peruse the twenty-two page (slightly wonkish) document, we’ve broken down the basic takeaway for you.

The equity markets have moved too far, too fast, and a correction is coming. Rather than buy into this rally, you should look at commodities. That’s because David believes that since 2001commodities took off on a secular bull market run.

Also, rather than hold US dollars, Rosie bets that the Canadian buck is a safer bet due to Canada’s smaller national debt (26% of GDP vs. 62% in the US), smaller budget deficit (-3.4% of GDP vs. -11.2% in the US), stronger banking sector (no Canadian bank needed a bailout), lower unemployment, and an economy more reliant on commodity exports like lumber, oil, natural gas and precious metals.

But the scariest–for holders of US dollars—forecast Rosie makes is that the US has yet to use a power policy tool: the devaluing of the greenback.

As Obama continues to take pages out of FDR’s playbook, he’s yet to devalue the dollar as FDR did in 1933. Rosenberg doesn’t say that the US policy wizards will directly devalue the dollar. Rather, he thinks it will happen by the expansion of the Fed’s balance sheet and the creation of freshly printed dollars.

We think he’s dead on about this call. The US’s “strong dollar” policy has become the latest oxymoron to enter the American vernacular. There is only one direction the value of the US dollar is going over the long-term—down.

Where exactly should you invest amidst this economic malaise? Here are the seven places to park your cash. Not surprisingly, our favorite precious metal tops the list.

1.) Gold

2.) Commodities

3.) The Canadian dollar

4.) Resource sectors of the stock market

5.) US sectors that have high foreign exposure (materials, tech, staples, healthcare)

6.) Canadian sectors that benefit from lower import costs (consumer stocks) but lose export competitiveness (manufacturers)

7.) Canadian bonds (a higher Canadian dollar will keep inflation low, hence reinforcing positive fixed income returns)

And Warren Buffett came out saying he’s buying equities again. All the while, the dollar is sitting at an 11 month low, and gold touched $1006 this morning.

As I perused the underground, I came across a piece by Jeff Harding of the Daily Capitalist that I had to share. He begins by asking, “how has the playing field for our economy changed and how will those changes affect our future? The answer to these questions will determine the future of the world’s economies.”

He then outlines the 7 mega-trends that will dictate our economic future. We’ve touched upon many of these ideas in previous issues. But here they are:

• Megatrend No.1. The culture of consumption is broken and won’t return to former levels. This is the key to everything.
• Megatrend No.1. The culture of consumption is broken and won’t return to former levels. This is the key to everything.
• Megatrend No. 2. Consumers will continue to increase savings to prepare for retirement.
• Megatrend No. 3. Declining U.S. consumer demand will continue to negatively impact the world economy.
• Megatrend No. 4. Deflation will continue for some time.
• Megatrend No. 5. Home ownership rates will decline to more historical levels of, say, around 66%, down from the high of 69% during the boom, which will keep a lid on home prices.
• Megatrend No. 6. Government stimulus and recovery programs only delay recovery and deepen the pain for workers.
• Megatrend No. 7. Massive federal deficits will double the national debt, result in higher taxes, and will act as a permanent drag on the economy.

If you have a chance, you should check out the piece in full. It is jam packed with facts and figures that will give you something to chew on for breakfast, lunch and dinner.

So where do these trends all lead?

All cycles eventually bottom out and growth resumes. The timing of any recovery is impossible to predict and for the most part it depends on what the government will do (or, hopefully, not do). The more the government interferes with the recovery process by propping up bankrupt banks, by manipulating the economy with fiscal and monetary stimulus, by creating a huge national debt, and by increasing taxes, the longer it will take.

With commercial real estate in serious decline, deflation will continue, and we’ll see more bank failures. While we may see a “bump” in GDP in Q3 and Q4, the liquidation of commercial real estate assets and other debt will accelerate. At some point, deflation will stop, and asset prices will find a bottom, as housing is starting to do now. My view is that the post-deflation economy will remain sluggish with high unemployment for some time. I believe that, unlike Japan, we will eventually see inflation.

There are significant differences between our economy and Japan’s and the comparison to Japan in the 1990s may not be entirely applicable here. The Japanese were reluctant to let banks and companies fail, but, despite a few notable exceptions, we aren’t. This is a necessary requirement for recovery, and we are better at “creative destruction” than are the Japanese.

Also, we have a more dynamic culture of entrepreneurship than Japan, making us more responsive to a recovery. However, the main difference is that Japan’s debt was largely financed internally due to their very high savings rate in the 1990s (about 14%). While our savings rate will continue to grow, I do not believe it will keep up with rising federal deficits, and we will need to finance our national debt on the international markets. This will drive interest rates up and put pressure on the dollar.

Then I believe inflation will assert itself as banks renew the lending cycle. I believe the Fed will maintain its loose monetary policy in order to keep interest rates down to stimulate growth. Governments always find it expedient to create inflation to give people the impression that the economy is growing. The problem is that inflation will depress the formation of real savings necessary to finance growth, and like the 1970s, we’ll see stagnation and inflation (”Stagflation”). If inflation gets out of hand, then, for a while we may see price and wage controls.

After that, who knows? Cut the money supply as Paul Volker did, and drive up interest rates and bring on a new recession? Continue to inflate? That’s too far in the future and politicians don’t think that far ahead.

At this level, gold isn’t overly dramatic. We haven’t seen any really big moves one way or the other. The big moves will happen, eventually, I believe. We just have to be patient.

Why do I believe that gold will soar? Well, we’re still in the early chapters of the overall “gold story.” The plot is still forming, although I believe that all of the main characters are on stage.

We have excessive U.S. government spending. It’s out of control, to all intents and purposes. We have the deepening federal deficit, and associated exploding national debt. We have significant monetary players overseas, like Japan and China and Middle Eastern nations, holding trillions of dollars worth of U.S. bonds and other paper — and getting nervous about it. We have a hollowed-out North American economy that’s turned into what historian Charles Maier calls an “empire of consumption.”

Then we also have the utter incompetence and hubris of upper-level U.S. politicians and policymakers. They’re collectively so out of touch that they don’t even know that they’re out of touch. We have the parallel incompetence of the Big Media, with their overall “infotainment” approach to presenting vital news to the American people.

Where’s the tragic theme? There’s this sense of denial that anything really bad can possibly happen. It’s the monetary equivalent of a Dec. 6 or Sept. 10 kind of thinking. It’s a failure of imagination at the highest levels.

And whatever does happen, there’s this attitude that the U.S. can add complexity to the system and “spend its way” out of anything. Big government? Sure, and let’s make it bigger. (Hey, let’s have the government take over health care while we’re at it.) Stimulus? Go for it. Bail out Wall Street? Of course — aren’t they too big to fail? Cap and trade, and thus cripple the U.S. energy economy? Yep, we’ll just “conserve” more energy and build lots of windmills. Right?

It’s just spend, spend, spend, spend, spend. Or control, control, control, control, control. And bureaucratize, bureaucratize, bureaucratize, bureaucratize, bureaucratize. Modern governance is all about spending money we don’t have on complexity that we, as a society, cannot afford in any sense of the word. And few of the power brokers at the top seem to think that there’s anything wrong with it. They’ll just pass another law, spend some more money.

The tragic part of this drama is that the high and mighty are setting themselves — and the U.S. economy — up for a terrible fall. Sooner or later, with all the spending and new bureaucracy, we’re going to have an implosion and see a collapse in the level of complexity. Those green “notes” that the Federal Reserve prints — with the nice pictures of dead presidents on them — will not be worth nearly what most people believe.

Neither you nor I can do anything to prevent it. (OK, write to your congressman, for all the good it’ll do. Or go to a town hall meeting, for all the good it’ll do.)

The answer, of course, is to protect yourself and your family, and save what you can. When the mighty tumble, be sure not to be standing there in the crash zone.

Source: My Favorite “Mistake”

“The Obama administration, for example, expects to run $9 trillion in deficits over the next 10 years – and that number is based on a recovery! Imagine what will happen if the economy doesn’t recover?”

Now, that’s a nice comforting thought to start our day right? NOT! WAKE UP! Morning has broken, and the coffee is on… If you are still of the thought that this is all going to end up seashells and balloons, then you need to stop and smell that coffee!

Oh brother! Looks like I’m full of you know what and vinegar this morning! Let’s try to calm down, Chuck, you’ve only just begun to write, you don’t want to peak so soon!

OK… Yesterday, I told you that the Asian stocks had sold off and that risk assets were being taken off the table. But that didn’t last long, and by mid-morning, I witnessed a nice currency rally, that wiped out the overnight selling. At one point during the morning a customer called to buy some euros, and when the sales person asked me for a price, I said, “you know, they may want to come back tomorrow morning, after the overnight markets beat the euro up, like we’ve so many times lately.”

But wait! That did not happen last night! So, I was wrong! The euro is getting some real love this morning after German unemployment fell in August, which was totally unsuspected. Euros and Swiss francs are the only currencies I see that have gained on the news this morning. So the Big Dog, euro, must have told the other little dogs to “stay on the porch”… Stay Rex!

German unemployment fell by 1,000… OK, now I know that this has the same feeling as removing a bucket of sand from a beach, when unemployment in Germany is 3.46 million! But, I never said that Germany’s economic recovery was a tidal wave! It’s smoking embers, that are in need of stirring, some small twigs, and leaves… My beautiful bride is an “expert” and getting a fire started like that, I should send her over to Germany, that would really kick the domestic demand to another level! HA!

Baby steps… That’s the way we’re going here… So, we’ve had IFO and ZEW think tank reports on Confidence all print stronger… We had the GDP surprise on the upside… And there was something else last week, but it slips my mind right now. The point here is that the Eurozone’s largest economy is waking up… We just have to hope it doesn’t hit the “snooze” button, now!

A reader sent me a note yesterday asking if I thought there would be a collapse of the Eurozone and thus the euro… If I had $5 for each time these stories have hit the streets, I would be sipping on a multi-colored drink in a tall glass with one of those tiny umbrellas, in a tropical setting… The point I’m making here is that on the outside Spain and Italy have problems… But what’s changed? These two had problems before they joined the Eurozone, and have had problems since joining the Eurozone… Me? I totally believe that these two get down on their knees each night and give thanks for being allowed to join the Eurozone!

So… In case you missed my answer in there… I don’t see that happening, at least not in the near future…

OK… Enough of that! The Reserve Bank of Australia ( RBA )met last night, and left rates unchanged, as suspected they would, and the following statement regarding their thoughts on the economy was relatively upbeat… However, the markets were looking for an indication of “when” the RBA would hike rates, and that didn’t happen… So… The markets were disappointed, and when they are disappointed with a Central Bank, they take it out on the currency! So the A$ got pounded overnight.

Now… Aussie GDP for the 2nd QTR is going to print tonight, I would have to think that the RBA maybe had a peek at the report, and thus their gearing down the interest rate hike talk… So… We could be looking at even weaker A$ prices tomorrow morning… Unless, that is, 2nd QTR GDP is as strong as it was once believed it would be!

Did you see where Canada printed a HUGE Deficit last week? Not a good thing… But, the Canadian balance position has teetered back and forth between Surplus and Deficit, but recently has remained in the red… You know me and deficits, so, I put a red mark next to the Canadian dollar / loonie… But then, you hear news like last night… Get this! PetroChina has agreed to pay C$ 1.9 Billion for a stake in a Canadian oil sands project. PetroChina will buy 60% of Athabasca Oil Sands Corp.’s MacKay River and Dover oil-sands projects.

That’s 1.9 Billion Canadian dollars / loonies that will have to be purchased… And You would have to think that China will be spending the “few loose dollars” they have in their pockets, which would put pressure on the green/peachback!

Canada is still in a recession, here folks… But… Could these be cheaper levels given the merger and acquisition activity? Only the shadow knows!

OK… So, here I am, 1 hour from when I began writing this morning, and all that glossy and shiny talk about the euro’s rally is fading… The Big Dog has lost 1/4 euro in the past hour… So… I wasn’t wrong after all!

OK, you’ll love this, or maybe you won’t, but I do, and since I’m writing this letter, I get to talk about it! HA!

Here’s the title of the story that flashed across the screen, and of course, caught my attention… “Goldman Sachs Wrong on Economic Recover, Macro Hedge Funds Say”

You’ve got me on this one! I’ve got to read on… “Paul Tudor Jones, the billionaire hedge-fund manager, who outperformed peers last year, is wagering that Goldman Sachs Group, Inc. and Morgan Stanley to it wrong in declaring the start of an economic recovery.”

“If we have a recovery at all, it isn’t sustainable.” One Hedge Fund Manager said… Calling this a “ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”

WOW! These guys must be reading the Pfennig! OK, I kid, because these guys would never bet caught with the Pfennig in their hands… They probably put it between the pages of the “Economist” so that others think they’re reading the Economist! HAHAHAHAHAHAHA!

Speaking of “must be reading the Pfennig”… I saw a thing that came across my desk yesterday that 57% of Americans would vote out every politician if the vote were taken right now! WOW! I didn’t know the Pfennig was read by so many people! Recall, I said weeks ago, to “fire them all”… Well, let’s hope that 57% grows to 95%, and Americans really do go through with their threat to vote them all out, if they continue to take us down the road to socialism / fascism / collectivism…

OK… You may recall a couple of weeks ago, I started asking you questions about the stock market rally, and it’s ability to continue on… I truly believed that the stocks were overbought, and the P/E ratios were out of control… Now, I see quite a few jumping on that bandwagon, and calling for a stock market reversal.

Do we really think the Gov’t will allow that to happen? Didn’t the President himself, say that he thought it to be a good time to buy stocks… Isn’t that sort of like a wink and a nod from the President that everything will be OK?

Beyond those conspiracy thoughts, let’s just say the markets get to go where the participants take them ( I know, it’s not reality, but let’s just play along ), and stocks begin to reverse their gains from March… I would think it to take an adverse affect on the currencies and their gains since March too… Throw Commodities in there too!

Now, in the old days, I would look at a stock sell off and say, currencies will rise… “Honey, put on the red dress tonight, we’re going out on the town!” but… These aren’t the old days… This is the new improved way of throwing all risk assets into the same barrel! And I don’t like it at all!

Ok… The Norwegian krone, traded with a 5 handle yesterday for the first time in a month of Sundays! It has traded back over 6 overnight… But, it was a good strong move from the krone yesterday nonetheless!

Well, today, we’ll see the ISM Index (Manufacturing) from August, and for the first time in 19 months, it is expected to be above 50! New readers might wonder what I’m talking about here… But it’s simple… 50 is a line in the sand that says any number below it represents contraction of manufacturing, and any number above it represents expansion of manufacturing… So, if it prints above 50 as expected one would say that manufacturing must be recovering…

Let’s look at that closer… Come on, closer, closer, closer! We’re experiencing a global recession, and global trade has been sketchy at best… But here’s U.S. manufacturing showing expansion… And… The rise has been quite steady since March… With March printing at 36.3, April 40.1, May 42.8, June 44.8, and July 48.9… See the steady rise?

What else has happened since March? That’s right, thank you for paying attention there in the back of the class! Yes, the currencies have been rallying VS the dollar… So, the dollar is much weaker than it was in March… The dollar index was 89.05 on March 5th, and today it is around 78… So… How did manufacturing / exports rise during this period of time? Because the dollar was weaker!

Let’s keep that in mind, eh? For if we get an adverse affect on the currencies from a stock sell off, this recovery in manufacturing could go kaput!

We’ll also see Pending Home Sales for July, and Vehicle Sales for August… Cash for Clunkers will push up the Vehicle Sales… But what happens next month?

Gold has backed off by about $8 in the past two days… It’s a dip… Therefore it must be an opportunity to buy at a cheaper price! I was reminding all my friends that we spent the weekend together at a lake, that I had told them to buy Gold $400 dollars in price ago… I was booed out of the room at that point, because you see, they didn’t buy it $400 dollars in price ago!

And on that note… I’ll head to the Big Finish!

Currencies today 9/1/09: A$ .8355, kiwi .6820, C$ .9125, euro 1.4295, sterling 1.6220, Swiss .9440, rand 7.7975, krone 6.0275, SEK 7.15, forint 192, zloty 2.8780, koruna 17.9110, RUB 31.8325, yen 93.10, sing 1.4430, HKD 7.75, INR 49, China 6.8303, pesos 13.44, BRL 1.88, dollar index 78.35, Oil $69.69, 10-year 3.38%, Silver $14.75, and Gold… $949.50

That’s it for today… Well, it’s been an unusually cool summer here in St. Louis… We had two separate weeks of hot weather, and that was it! It normally is much hotter, with very high humidity… I wonder what that means for this coming winter! UGH! Just found out yesterday that I won’t be going to Marco Island this December to speak like I had the previous two years… UGH! September is the last full month of baseball, and with the Cardinals in first place in their division, this should be a good month! There are two middle of the week day games in September, and I always enjoy those! So… Summer may be coming to an end, as along as September takes a long time to work through, I’ll be OK! All righty then, let’s get going on this Terrific Tuesday, the first day of September!

Source: More Baby Steps For A German Economic Recovery

This has been a tough quarter for companies. Compared to last year’s second quarter, profit is down roughly 31 percent and revenue is down even more. Wall Street thought it was going to be even worse. So in one of the worst quarters ever, the market has rallied.

Investors learn all the wrong lessons from a rally like this. Nothing about it makes sense. The smallest companies are outgunning the biggest one. The most heavily shorted stocks are doing better than the least shorted stocks. The companies with the worst analyst ratings are outshining the ones with the best ratings. Everything about this rally is backwards.

Over the past 37 years – from 1972 to 2009 – these “best of breed” companies have made shareholders 2.3 times more money than the stock market as a whole. For every $100 you made from the stock market, you would have made $230 from these “best of breed” companies.

That’s not just slightly outperforming the market. That’s lapping the market and then some. And it’s even more impressive when you take into account everything this period covered. It’s been an eventful 37 years of embargoes, stagflation, a savings & loan crisis, an Asian economic crisis, a Russian national debt default, a near collapse of the Mexican peso, 9/11, two gulf wars, the bankruptcy of the Long-Term Capital Management hedge fund, the dotcom rise and fall, a bursting of the housing bubble, credit bubble and spending bubble. Forgive me if I’ve left some “minor stuff” out like the fall of the “Iron Curtain” and the rise of China.

Through all this, these companies gave their shareholders a steady and rising stream of revenue and a return that, as I’ve said, was more than 2.3 times what the markets gave. Who wouldn’t want that?

Everybody would. And that’s a big problem for all those mutual funds which don’t touch these companies … and for the hyper-active Wall Street press which makes a fuss over a dozen things every day but somehow misses the biggest story of all…

The existence of a class of companies which know how to put ever-increasing amounts of cash into the pockets of their shareholders, year in and year out, decade in and decade out.

Almost as bizarre as our junk rally are dividend-paying companies that can do no wrong. The ones strong enough and confident enough to raise dividends are going up in price. And the ones that are cutting dividends? Many of them are going up too.

Shareholders have recently been accepting smaller checks without protest and without selling their shares. They are evidently willing to take the hit today so the company can grow profits tomorrow. It’s easier to do when investors think that some kind of recovery is around the corner. If that recovery doesn’t materialize, these shareholders will be showing much less forgiveness to dividend cutters. I don’t want to own these companies when that happens.

If I were an investor in any of those companies, I’d sell my shares right away. The whole point of investing in the “best of breed” companies is that you get paid no matter what.

Everybody is cutting costs, the strong and weak companies alike. But not all dividend companies are cutting their dividends. Just slightly more than half are these days. It pays to invest in the dividend hikers, not so with the cutters. Let other investors be forced to rely on a recovery to reverse their portfolio losses.

You should be and can be making money even if the economy remains weak. As long as there are “best of breed” companies still raising their dividends, there’s no reason why you should sacrifice your pay “for the good of the company.”

The scary thing (for us and the Fed) is that low-interest rates aren’t speeding up the recovery. People aren’t willing to borrow. And banks aren’t willing to lend. The amount of money floating around the economy is pretty stagnant. The Fed should be pretty discouraged. They have $2 trillion on their balance sheet. And all they have to show for it are some banks which should have gone under but are instead giving its employees million-dollar bonuses.

Dividend companies are getting a little respect again. They may even have become the “new fad” according to the UK’s Telegraph. Here’s the money quote…

Few professional investors are banking on a return to the super-charged capital gains we have seen from equities in the past. Rather, the new fad is for companies capable of delivering reliable sources of income. Historically, dividends have been responsible for more than half the return on equities. In the more risk-averse environment which is the new norm it may be rather more than that.

But why be satisfied with just a “reliable source of income” when you could get income which is both reliable and growing. Perhaps the Telegraph doesn’t realize that with “best of breed” companies, you can have your cake and eat it too. But the Telegraph isn’t the only newspaper or media outlet that doesn’t “get it.”

Nobody is talking about these companies providing reliable revenue to shareholders for decades (yes, I said decades) and increasing their dividends at rates of 25-40 percent every year. Yes, I said 25-40 percent every year.

Do the math. A company raising its cash payments to you by 25 percent every year will double the money it pays you every three years! If you’re getting $10,000 in cash every year from a company now, in six years you’ll be getting $40,000.

These aren’t junk bonds. They’re not risky derivatives. They don’t depend on a bull market. These payments come from some of the safest and strongest companies in the market. When companies provide rising cash payments for decades and generate plenty of cash with above average profit margins, they qualify for “best of breed” status.

Actually, some people out there do “get it.” One of them is Hersh Cohen. He has managed the Legg Mason Partners Appreciation fund for the past 30 years. Over these three decades, his fund has done better than the S&P 500, the dividend-company benchmark index and the average return for large-capitalization stock funds. Cohen, who holds a doctorate in psychology, says he focuses on companies with “superior balance sheets and rising dividends.”

Cohen says his academic training helps him when the market goes to extremes. During such times he likes to go against the flow, cutting back when the market is euphoric and increasing his bets when others panic “and stuff is being given away.”

I’m not a fan of mutual funds. I think they’re terrible instruments, trapping investors into very narrow styles of investment long past the time when those styles made a buck. And I don’t think mutual fund managers are the sharpest tools in the investment shed. So when I see an exception, I try to point him out. Cohen is an exception.

If you’re interested in doubling your money every three years with very little risk, there’s only one way to do it. Invest in “best of breed” companies.

To your investing success,
Andrew

Source: Why ‘Best of Breed’ Investing Is No Passing Fad

Unfortunately, it’s too late to reverse course for America. President Obama’s spending program is speeding up the collapse, not slowing it down. Right now, 21 cents out of every $1 paid over to the feds in income tax goes to paying off the interest on the national debt. Soon, it will be almost double that amount. It doesn’t take a genius to work out that this is unsustainable.

It doesn’t take a genius, either, to figure out that higher spending and higher debt mean higher taxes and a weaker dollar. Here are just some of the shocking forecasts James makes in this explosive report:

• No matter who you are, your taxes will go up. The government will continue to raise taxes in an attempt to keep its spending programs alive. The Obama administration is already planning to raise corporate taxes, already the second highest in the world. The costs of this will be passed on to you whenever you buy something.
• The US dollar is already being undermined as the world’s reserve currency as US debt holders led by China, Russia, India and Brazil move to protect themselves against dollar depreciation. Soon the dollar will lose its reserve currency status.
• The Social Security Ponzi scheme will collapse. The government will be unable to borrow the funds it needs to replace all the money it has already spent from the Social Security trust fund.
• Interest rates in the U.S. will rise to 6% plus as the government needs to raise the rate to stimulate foreign demand.
• Excessive government borrowing will push up mortgage rates and trigger another leg down in the housing market. Huge numbers of prime borrowers have already begun to default on their mortgages, triggering what is destined to become another wave of toxic asset writedowns at banks.
• The government will default on Social Security payments and Medicare and Medicaid obligations. It will not do so in an open way. Instead, it will fail to accurately index-link Social Security benefits to the cost of living… it will ration hospital stays and doctors visits… and it will deny expensive treatments and medication to state-insured patients (beginning with the elderly)
• The US will enter a long period of economic stagnation coupled with inflation.
• In years to come, the period between 2008 and 2018 will be known as America’s “lost decade.”
• Oil prices fall to $25 a barrel before breaking through their July 11 2008 high of $147.90 a barrel.
• Unemployment rates will rise to 20%.

James is a personal friend. And he’s one of the best thinkers about the global economy we know. Back in 1993, James sent out a similar warning to investors. His forecasts, 14 years before the subprime collapse was ever heard of, were scarily accurate…

· I see at millions unemployed or in make-work public assistance jobs.

· I see millions more homeowners “upside down” – with a mortgage bigger than the value of the home.

· Banking industry problems will prove too big for the government to paper over.

We strongly urge you to read James’s latest report. Of course, he could be wrong. The nearly $12 trillion national debt could just keep on growing to infinity with no serious repercussions for America’s economic standing in the world. The breakneck increase in the money supply since the outbreak of the economic crisis may not trigger a dangerous inflationary cycle. And President Obama might pull a white rabbit out of a top hat instead of increasing taxes to pay for his bloated budget. But we doubt it. As we like to say here at Notes, “Smart investors hope for the best, but they prepare for the worst.”

The Congressional Budget Office (CBO), the non-partisan federal agency responsible for providing economic data to Congress, knows the game is up, too. This from the CBO’s director’s blog:

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy. […]

Keeping deficits and debt from reaching these levels would require increasing revenues significantly as a share of GDP, decreasing projected spending sharply, or some combination of the two.

We believed in Santa as a kid. But we don’t believe that Team Obama is going to decrease spending “sharply” or otherwise. So “revenues” (aka taxes) will have to rise.  And to soften the blow, you can count on the administration reneging on its Social Security and Medicare obligations.

What Barack Obama and Joe Biden just don’t get is that too much taxation drove the American Revolution. And with the federal government now consuming about 28% of GDP and state and local governments another 15%, tax hikes are inevitable. In fact, they are already here. This from well-known fiscal conservative Pat Buchanan:

Obama plans to repeal the Bush tax cuts and take the income tax rate to near 40%. Combined state and local income tax rates can run to 10%. For the self-employed, payroll taxes add up to 15.2% on the first $106,800 for all wages of all workers. Medicare takes 2.9% of all wages above that. Then there are the state sales taxes that can run to 8%, property taxes, gas taxes, excise taxes and “sin taxes” on booze, cigarettes and, soon, hot dogs and soft drinks.

Comes now national health insurance from Nancy Pelosi’s House. A surtax that runs to 5.4% of all earnings of the top 1% of Americans, who already pay 40% of all federal income taxes, has been sent to the Senate. Included also is an 8% tax on the entire payroll of small businesses that fail to provide health insurance for employees.

One thing you can be sure of is that the world’s economic mandarins are slow to learn from the mistakes of history. This from the Daily Reckoning:

After the expansion comes the contraction. After the bubble comes the clean-

up. After the storm comes the sun.

But what is going on in China? What comes after the biggest export-led
bubble ever? Another bubble?

It doesn’t seem possible. China’s number one customer is broke. It has far too
many factories for those that are left. It should be closing up shop…and
waiting out the bad weather. And yet, China is growing. A combination of hot
money…and hot financial policy…is falling on everyone’s favorite green shoot
like Miracle-Gro. Its trade surplus and foreign direct investment – the usual
source of reserves of foreign currencies – are only half what they were last
year. But the speculators are coming in…and they are bringing cash. This has
boosted Chinese reserves past the $2 trillion mark…and provided the liquidity
for another round of bubble-like conditions. Trading volumes in Chinese
stocks, for example, are running three times last year’s.

The world’s investors and economists think they are looking at the Second
Coming. Chinese growth will power the world out of its slump.
Hallelujah…we’re saved! Things will be ‘back to normal,’ soon. Stocks rose
yesterday in anticipation – with the Dow up.

Daily Reckoning readers are warned: this too shall pop.

Nobody seemed particularly interested in the far greater scam being pulled off on a daily basis by the US government (a scam that, incidentally, pays for Judge Chin’s salary and Madoff’s stay in the “big house”).

But it’s clear to us here at Notes at least that the government’s $15 billion a day borrowing habit dwarfs Madoff’s $65 billion Ponzi scheme.

As of June 18 2009, total US federal debt was $11,342,734,351,973 –  or about $36,989 for every American. This represents 82.5% of one year’s worth of US economic output as measured by GDP. President Obama’s 2010 budget estimates that total debt relative to GDP will rise to 97% by 2010 and stabilize at approximately 100% thereafter.

In other words, this borrowed money cannot be paid back. It is mathematically impossible – even if income taxes rose to 100%, which itself is impossible. Just paying the $260 billion in interest owed on the national debt (just over half what the government spent on defense last year) requires further borrowing. And the more the government borrows, the more it needs to borrow to pay off the interest owed.

It’s a generational Ponzi scheme of truly epic proportions. And one as sure to end in tears as poor old Bernie Madoff’s.

We’d also love to hear from Team Obama what the difference  is between the Madoff fraud and Social Security is. The answer, of course, is coercion. This from Paul Kasriel of Northern Trust (Hat tip, The Business Insider):

Both depend, or in the case of Madoff, depended, on being able to get new contributors into the scheme in order to pay off the previous contributors. The Social Security Administration has the power of the law to force new contributors into its scheme. Madoff did not have the power of the law to force new contributors into his scheme, therefore, he has been accused of breaking the law. Just another example of how it’s good to be the king.

The mainstream media was also strangely silent yesterday on the role Wall Street insiders played in legitimizing Madoff’s scam.

Many big finance insiders knew all too well that Madoff was a crook. Madoff’s returns were simply too good to be true. That’s why they invested in him. Problem is they thought he was inside trading, not a Ponzi scheme. This from ClusterStock.com:

For years and years I’ve heard people say that [Bernie's] investment performance was too good to be true. The returns were too steady – like GE earnings under Welch – and too high given the supposed strategy.

One Madoff investor, himself a legend, told me that Madoff’s performance “just doesn’t make sense. The numbers can’t be straight.” Another sophisticated Madoff investor actually went through trade confirms in order to reverse-engineer the strategy and said, “It doesn’t add up.”

So why did these smart and skeptical investors keep investing? They, like many Madoff investors, assumed Madoff was somehow illegally trading on information from his market-making business for their benefit. They didn’t consider the possibility that he was clean on that score but running a good old-fashioned Ponzi scheme.

…like money just appears by magic in my magic wallet or something, and all I have to do is get it out of my pocket and start handing out twenty-dollar bills to anybody who asks me for one – was (unlike me who was down in cash last week), up another $4 billion last week, taking the 12-month total of new physical currency up another $77 billion, bringing the grand total (“ka-ching!”) to $894 billion, which is not a lot when you consider all the tens of trillions of dollar’s worth of stuff out there all based on this little bit of “real” money! Hahaha!

But it is still a $770 increase in the cash money supply, in one month, for everybody in this country that has a private-sector job, with which to make a profit, with which to pay for everything, including remitting taxes.

And in the week when the Federal Reserve increased credit in the banking system by a big ol’ $76.8 billion, of which the Fed itself bought up $56 billion dollar’s worth of Treasury debt, the Gross National Debt increased by a huge $77 billion, taking the nation’s federal indebtedness to a staggering $10.789 trillion, which is so much, and so bad, that it makes you involuntarily scream out loud in your nightmares and then get up the next day and buy as much gold as you can get your hands on, but it is even worse than that, as the damnable Congress has further indebted us, in the last twelve months alone, by almost exactly $1.5 trillion!

In one freaking year!

I thought that TheBurningPlatform.com was going to comment on this astonishing fiscal irresponsibility of Congress and the Federal Reserve, but instead they commented on the $787 billion, 1,074 page stimulus bill that was just signed by Obama by noting, “The current ‘stimulus’ package of $787 billion is more than the entire National Debt in 1978 ($771 billion).”

I shook my head in bewilderment, and I thought, “What in the hell does this have to do with the national debt and how the loathsome Congress is spending us into the poorhouse by turning the purchasing power of the dollar into Pure Unadulterated Crap (PUC) by spending so much and requiring that the Federal Reserve produce, out of thin air, all the money and credit necessary for their despicable, corrupt profligacy, which is a word that always reminds me of whipping, and now that I think about it, I think that a mere whipping is too good for Alan Greenspan, former chairman of the tyrannical Federal Reserve, without whom all the inflationary spending and grotesque entitlement excesses would not have been possible and we would not be where we are today, economically bust-wise, although we would still be as old and decrepit since you stupid Earthlings put your inventive minds to developing weapons and bleeding-heart excuses to enlarge government entitlement spending instead of creating a youth serum or a pill to give you “six-pack” abs without dieting or exercise.

But it turns out that they are talking about housing prices, and say that “It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued”, which means that “prices need to fall 20%” from here, and maybe more, as “long-term averages are created by periods of overvaluation followed by periods of undervaluation”, by which they mean, and I quote, “could fall 30%” from here, which makes you catch your breath in dismay at the prospect.

The catastrophe of such a thing like that happening kind of dazed me with a sort of petrifying fear, and the next thing I knew they were talking about the federal budget deficit, too, and that the deficit for 2009 “is now estimated at between $2 trillion and $3 trillion, give or take a few hundred billion.”

They go on, “These figures seem incomprehensible to the average person on the street”, and I think to myself, “You said a mouthful there, buddy!” as I am, literally, sitting on the street, having been thrown out of the stupid bar just because I was complaining about how the drinks all cost more these days, and I was blaming the greedy bartender, and he gets right in my face and says the reason that the drinks cost more is that the Federal Reserve creates money and credit, which makes prices go up, which surprised me so much that I blurted out, “This is incomprehensible to me! I always thought you were a  stupid moron lowlife ball of garbage who never listened to me, but I see that you are, at least, not stupid about where we get inflation in prices!”, which I thought he would take as a compliment…but he did not.

And as I sit here, I realize that, thanks to the drinks being more expensive, I am not as plastered as usual, and with rare clarity, I see the need to get a pizza and some more gold because I am going to be very, very happy with some of each very, very soon!

Source:  A Government of Spendaholics

Martin Denholm of the Smart Profits Report shows us where to find the profits in the wreckage.

This from Martin:

Hey… wake up, Larry. The coffee is ready.

If you were as amazed as I was at the sight of President Obama’s chief economic advisor, Larry Summers, snoozing through Obama’s Fiscal Responsibility Summit on Monday (on the podium, no less), hopefully these numbers will shake him out of his slumber…

The latest S&P/Case-Shiller index shows that home prices in 20 U.S. cities plummeted by 18.5% in December, compared with December 2007. On the back of an 18.2% slide in November, it was the fastest decline on record and extends a decline that began in 2005. The 10-city index fared even worse, sinking by an annual 19.2%.

From its high in 2006, the 20-city index has tanked by 27%, with Phoenix, Las Vegas, and San Francisco leading the way down during December. On a national scale, the Case-Shiller index showed an 18.2% drop compared with Q4 2007.

Let’s take a look at the real estate market and see how investors could play this news…

Homebuyers Should Have Adopted The PAYGO Plan

The housing numbers came just a day after Obama proposed a PAYGO approach to government spending at the Fiscal Responsibility Summit. Simply put, it’s based on the “You don’t spend what you don’t have” concept, making cuts to fund spending plans.

Forcing the government to balance its books and pay more attention to the national debt sounds great in theory. It’s an approach that helped turn America’s federal deficit into a surplus over the 1990s and the early part of the 2000s.

But of course, the country wasn’t mired in two prolonged military conflicts, nor did it face the worst economic climate in a generation – issues that don’t discriminate when it comes to book-balancing efforts or debt levels.

And at the current rate the government is going, it’s going to have to find a lot of extra pennies buried in the couch – or make some significant cuts – because Obama is clearly determined to spend his way back into prosperity.

There’s No Place Like Home For $275 Billion

With housing however, this fiscally responsible PAYGO approach would have worked wonders for many homebuyers who now find themselves clutching for the last bit of rope. Record foreclosures (up 83% to 2.3 million in 2008, according to RealtyTrac) and slumping property prices (down a record 8.2% in 2008, according to the Federal Housing Finance Board) have eaten into Americans’ wealth and eroded consumer spending, which makes up about two-thirds of the economy.

To combat it, Obama wants to pump $275 billion into the real estate market in order to flatten out its freefall. And as I wrote last week, $75 billion of that housing aid package will go towards allowing homeowners to refinance and lower their monthly mortgage payments in a bid to slow the foreclosure rate.

Whether these efforts will work… time will tell. But check out this interesting nugget from Minyanville:

“While pundits and politicians debate the various aspects of President Obama’s $275 billion housing bailout, one piece of data proves just how misguided federal efforts to revitalize the housing market are: $275 billion could buy more than half of all American homes already in foreclosure.

“Such an undertaking would remove distressed homes from the market and spur community revitalization efforts throughout areas desperately in need of the hope they were promised in November.”

The housing recovery isn’t going to happen anytime soon. With the foreclosure rate still rising (up 18% in January), it’s still squashing prices. And with home demand very weak, there’s a big supply of excess homes on the market.

And that’s crippling this industry…

Trouble For Toll

“The past five months have been among the most difficult in U.S. economic history.”

And the award for “Most Obvious Statement” goes to…

Robert Toll, CEO of fallen homebuilder giant Toll Brothers (NYSE: TOL).

Toll was speaking on the back of a 51% plunge in his company’s first quarter revenues – a trend symptomatic among the nation’s homebuilders.

Prospective buyers aren’t buying, amid job security fears. And sellers can’t sell their homes, due to the depressed economy and market. And with the glut of unsold homes on the market and prices falling, homebuilders have no reason (and no money) to build any more. Toll says new home construction is at its lowest level in 50 years.

And profits are tanking. Analysts project a $0.30 per share first quarter loss for the company – but Toll is so concerned about the economy and uncertain about the market that it hasn’t even bothered to issue any guidance itself.

Others aren’t hanging around to participate in the carnage any more…

Insiders Are Bailing On This Builder

Recent SEC filings show that Dwight Schar, founder of NVR Inc. (NYSE: NVR) recently cashed in his housing chips, dumping 339,059 shares worth $139 million.

Smart move. He sold at an average price of $409.90 each. The stock’s current price is around $348.

He’s not the only one either. Four other company directors and the CEO have also been busily selling their holdings this month.

One razor sharp analyst called this spate of so-called “cluster selling” (which occurs during particularly weak periods) “a pretty bad signal” for investors (okay, so I’m giving that “Most Obvious Statement” award to him now).

Profit From The Housing Pain

With the National Association of Realtors announcing this morning that existing U.S. home sales defied projections for a rise and dropped by an annual 5.3% in January from December – the lowest since July 1997 – homebuilder stocks are getting knocked around again.

The median home price: Down 14.8% to $170,300 in January – the lowest price since March 2003. And 9.6 months worth of unsold housing inventory.

Whether this marks anything approaching a bottom or not remains to be seen. But in any event, homebuilders that have struggled to turn a profit over the past few years are now closer to going bust instead.

To combat the slide, homebuilders have dumped as much land as they can and trying to load up on cash instead. But in this market, that’s obviously coming at a loss. And when the assets run out… what then in a still-depressed market? Not to mention the debt that many companies have accumulated, due to excess leveraging during the boom times.

On a broad scale, you could take a look at playing the downside of sector ETFs like the SPDR S&P Homebuilders (NYSE: XHB) – already down 55% over the past year.

But if you want to look for downside in individual stocks, focus on ones whose debt-to-equity level is high and/or who are running low on cash. And when insiders are selling, that’s usually a good indication that you should do the same.

Source: How To Send Your Profits Up As America’s Homebuilders Go Down